Russian insurance market, 2007

Table 1. Companies – leaders of the Russian insurance market by collections (without OMI), including re-insurance, 2007
Table 2. Russian insurance companies by size, 2007
Table 3. Financial indicators of the leading Russian insurers (31.12.2007), thousand rubles
Table 4. Leaders in collected premium – net re-insurance, 2007
Table 5. Life insurance, 2007
Table 6. Voluntary medical insurance, 2007
Table 7. Outgoing tourism insurance, 2007
Table 8. Accidents and diseases insurance, 2007
Table 9. Ground transport insurance, 2007
Table 10. Motor vehicle liability insurance (voluntary), 2007
Table 11. Water transport insurance (including liability insurance), 2007
Table 12. Aviation risk insurance (including liability insurance), 2007
Table 13. Space risk insurance (including liability insurance), 2007
Table 14. Cargo insurance, 2007
Table 15. Cargo carriers liability insurance, 2007
Table 16. Insuring property of legal entities from fire and other risks, 2007
Table 17. Insuring construction-erection risks (including liability insurance), 2007
Table 18. Individual property insurance, 2007
Table 19. Financial risk insurance, 2007
Table 20. Insuring liability of enterprises – sources of increased danger, 2007
Table 21. Professional liability insurance, 2007
Table 22. Agricultural risk insurance, 2007
Table 23. Incoming re-insurance, 2007
Table 24. Obligatory medical insurance, 2007
Table 25. OSAGO, 2007
Table 26. Obligatory personal insurance (excepting OMI), 2007
Table 27. Big payments

Mad race

Aleksey Yanin

Dramatic fight of insurers for potential investors set forth a task of seizing the largest market share at any price – conniving at threats to your company’s financial stability. Such actions undermine credibility of individual players and the market as a whole, making general instability stronger and easing purchase of Russian insurers by foreign investors.

The former year saw the Russian insurance market accelerating with enormous speed and changing drastically. The first stage – the market inception – went on for 14 years (till 2003) and featured permanent scheme-service “slumber” of Russian insurers. The second stage – internal transformation – witnessed dramatic departure of the market players from scheme activity and speedy modernization of the Russian insurance industry. The domestic market passed the stage within 3 years – from 2003 to 2006. 2007 was characterized by residual cleansing of the Russian insurance from tax-optimizing operations – the job was mostly done before. According to Expert RA, in 2007 the real Russian insurance market, free from pseudo-insurance operations (without OMI) amounted to 437 bln rubles - 105 bln rubles above (31.8%) 2006. Scheme operations in the market took 10% of all collections (2006 году – 18.2%). Pseudo-insurance share in consolidated collections went down to volumes, characteristic of highly developed insurance markets; in the near future the ratio between classic and schematic insurance would remain relatively stable. You can safely say: the “scheming” issue for the Russian insurers was laid by the wayside.

Russian insurers in 2007 entered the period of extensive growth and re-distribution, characterized by swift and major changes, high level of uncertainty and the market volatility. The trend remains consistent through the current year, too. Without any exaggeration, the future of the majority of Russian insurers and even the whole Russian insurance market has been determined presently; we face the key stage of the domestic insurance development.

Losses pile up

Prerequisites for highly unstable market environment were laid by insurers in 2006. The Russian insurance market benchmark study by Expert RA showed: the market average combined net un-profitability (with current operation expenses) in 2006 was 92.8%, the largest universal insurers – 104.46%, 2007 – 93.8% and 101.1% accordingly. In case of leading insurers average un-profitability level is still above 100%, meaning the main (insurance) activity brings losses to the majority of the market leaders for the second year running.

Growing un-profitability is definitely explained by dumping and exorbitant commissions to insurance middle-men. It is manifest in reduced tariffs for voluntary risk insurance, most of all in casco motor insurance. Almost all insurers try to increase volumes through dumping prices and incur significant losses as a result. The market leaders no longer hide it.

Signing insurance agreements becomes costlier, too. Active consumption crediting within the last couple of years put at the forefront non-insurance middle-men as channels for selling insurance services. Insurers’ commissions paid to such channels sometimes exceed 30-35%. Insurers are on the intense lookout for cheaper channels and develop different forms of direct insurance, including internet-sales, but resultant insurance premium is still low. Truly, the retail insurance market is presently controlled by middle-men instead of insurance companies.

Un-profitability grows up due to “natural” causes, too – skyrocketing prices for car repairs in the absence of sufficient amount of garages, constant (several times a year) increase of medical services without notable quality improvement.

The legal entities insurance market is characterized by sharp price competition between insurers and features active redistribution. According to Edgar Pleskanovsky, VTB Strakhovanie deputy general director, “so far direct insurance reduced tariffs at the relatively “soft” re-insurance market caused no serious problems in re-insuring certain risk categories. But inevitable change of cycles may create problems for Russian insurers, related to transferring risks for voluntary re-insurance and growing prices for obligatory re-insurance protection, which will make insurance activity even less profitable”.

Lowered insurance profitability is also attributed to growing costs of maintenance of insurance agreements. According to Expert RA, in 2007 average Russian insurance market share of operation expenses in net contributions reached 36.3%, universal companies (market leaders) – 37.9%. Retail insurance development makes the whole insurance business more technological. You need more complicated and expensive information systems and CRM-solutions. Insurers also face constantly increased volumes and costs of consultant services. Another fundamental problem in the insurance industry: growing salaries and wages, accompanied by dramatic lack of insurance specialists of even average quality.

Endless saga

By refusing to consider the issue of increasing OSAGO tariffs this year, the state has undermined the Russian insurance market stability even more, making it ever more uncertain. OSAGO insurance – once a promoter of domestic insurance retail – completely turned into strong headache for insurers. The present OSAGO un-profitability is critical – 90% for the whole market, over 100% in certain towns and settlements with tariff ratio 0.5. Introduction of European protocol and system of direct settlement of losses without adequate increase of tariffs would inevitably make OSAGO un-profitability exceed 120% in 2009 – to be followed by the whole OSAGO market collapse.

Ekaterina Krukovskaya, an Ingosstrakh analyst, says: “Innovations may bring about increase of small payments, fraudulent cases and, consequently, growing un-profitability. Many companies pay high commissions exceeding OSAGO standards (sometimes 45%). 2008 may expect other 10-15 companies to leave the OSAGO market following their bankruptcy at the particular market segment”.

Un-profitability of obligatory motor insurance consistently grows up and causes certain insurers to wrap up their operations in the most un-profitable regions or leave the insurance market altogether. Igor Ivanov, RESO-Guarantee deputy general director, says: “increased OSAGO un-profitability is very troublesome: many regional insurers may leave the market, being incapable of settling increased payments”.

Clearly, tariffs would be raised sooner or later, but nobody knows when and who would survive to see the raise. OSAGO tariffs uncertainty mounts the market instability and pushes numerous insurers to sell their business.

They have arrived

Turbulent growth of the Russian economy and new household consumption structure finally convinced the world financial leaders to invest into the Russian insurance sector. Period of foreign observation of the Russian insurance market is over.

The Russian insurance market has become the largest one in Central and Eastern Europe and is a priority for companies interested in staking their claim at the largest developing markets, and for European insurers, stepping up their activity in the new Europe countries with similar geography and mentality.

Aleksey Zubets from Rosgosstrakh Center of strategic studies, said to Expert RA: “share of foreign insurers in consolidated capital of Russian companies in 2007 was doubled and reached 9%, or 15.4 bln rubles. The Russian market altogether has 78 insurers with foreign financial involvement. Size-wise the Russian insurance market looks evermore like Central and East European markets and may expect consistent attention from large international companies”.

Gennady Smirnov, general director of Russian Insurance Company expects “mergers and acquisitions to be continued in 2008. Share of foreign capital at the Russian insurance market in 2009 may exceed 25%”.

Presently many potential investors are interested in “starting from scratch” or purchasing an acclaimed Russian insurance company. Last year several Russian renowned insurers were bought by foreign companies. Several large-scale deals took place in 2007: strategic investors bought blocks of shares of Russian insurers. Here are several examples: German Allianz increased its share in ROSNO up to 97% (purchased 49.2% shares for 750 mln dollars with multiplier 2.1), RESO-Guarantee was purchased by AXA (36.7% shares for 810 mln Euro with multiplier 2.4, optional purchase of the rest in 2010 and 2011), purchase of NASTA by Zurich Financial Services Group (66% shares for 260 mln dollars with multiplier 1.6, optional purchase of the rest in 2010). Evidently, many large foreign insurers opted to make aggressive steps at the Russian insurance market and increased their presence. Similar deals are to be signed the current year.

Still, foreign presence in the capital of an insurer does not guarantee a competitive success. Andrey Bondarenko from analytic department of Capital Strakhovanie, says: “to transform a purchased company into an operator corresponding to international standards, you have to go through serious financial expenditures and painful internal reforms. Activity of such insurers within next couple of years would tell us whether foreign financial interventions into such companies are reasonable, or purely Russian companies would be more competitive”.

According to Expert RA, long-term foreign domination at the Russian insurance market would be extremely negative for the Russian economy as a whole. The insurance sector is a part of our financial system and is of strategic importance to our economy. Tariff policy and practice of taking risks of insurance companies may affect costs of domestic goods and services and reduce their competitive edge in relation to foreign goods and services. High foreign investments in insurance capital would make the Russian insurance sector dependent on foreign capital; centers of strategic decision-making, including choice of investment objects by insurance funds, may be moved outside Russia. Substantial financial flows would go out of the country.

Working along new lines

Combination of all the above factors pushes owners of numerous insurance companies to sell their business. Such insurers either initially planned to increase their market share and sell themselves out with maximum possible multiplier, or they would inevitably face the problem of high un-profitability and quit the race. We may safely say: 2008 would see the end of bizarre dumping; the market would acquire relative stability.

Sergey Tishchenko, general director of Standard-Reserve and Moscow Insurance Company, said to Expert: “leading players no longer conceal their losses in motor insurance, so we may expect growing tariffs, reduced commissions and improved financial results. Un-profitable business for the sake of selling would be replaced by a normal profitable market model. 2007 should become a breakthrough year. Almost everybody, who wanted to be sold and had reasons to be bought, was sold, it is time now to work along new lines”.